The Iraq Missing Billions Report

8/9/2019 The Iraq Missing Billions Report

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For more information, contact SIGIR Public Affairs at

(703) 428-1100 or [email protected] Special Inspector General for Iraq Reconstruct

SIGIRSpecial Inspector General for IRAQ Reconstruction

Summary of Report: SIGIR 10-020

Why SIGIR Did this Study

The Development Fund for Iraq (DFI) was

established in May 2003 by the Administrator ofthe Coalition Provisional Authority (CPA) andrecognized by United Nations Security CouncilResolution 1483. DFI funds were to be used ina transparent manner for the benefit of thepeople of Iraq. After the CPA was dissolved inJune 2004, the U.S. government was authorizedby the Government of Iraq (GOI) to administerDFI funds made available for reconstructionprojects. The Department of Defense (DoD)managed DFI funds on behalf of the U.S.government. That authority was withdrawneffective December 31, 2007.

Our reporting objective is to determine whetherDoD organizations adequately accounted for thefunds they received from the DFI. To helpaccomplish this objective we selectivelyreviewed records from eight DoD organizationsthat received DFI funds.

Recommendations

SIGIR recommends that the Secretary ofDefense take a number of actions to includespecifying procedures for the accounting andreporting of non-U.S. funds in futurecontingencies, designating an executive agent to

establish and oversee policy on the use of funds,establishing milestones for issuing guidanceconsistent with our DFI recommendations madein October 2009, and determining whether DoDorganizations are still holding DFI funds.

Management Comments and Audit

Response

We received comments from the Office of theUnder Secretary of Defense, (Comptroller), U.S.Army Corps of Engineers (USACE), and U.S.Central Command on a draft of this report. TheComptroller concurred with the report

recommendations. USACE and U.S. CentralCommand provided technical comments that weaddressed where appropriate.

July 27, 2010

DEVELOPMENT FUND FOR IRAQ: DEPARTMENT OF DEFENSE NEEDS

TO IMPROVE FINANCIAL AND MANAGEMENT CONTROLS

What SIGIR Found

Weaknesses in DoDs financial and management controls left it unable toproperly account for $8.7 billion of the $9.1 billion in DFI funds it receivedfor reconstruction activities in Iraq. This situation occurred because mostDoD organizations receiving DFI funds did not establish the requiredDepartment of the Treasury accounts and no DoD organization wasdesignated as the executive agent for managing the use of DFI funds. Thebreakdown in controls left the funds vulnerable to inappropriate uses andundetected loss.

The Department of the Treasury established guidance for accounting fornon-U.S. government funds when U.S. agencies act as a custodian of thosefunds, but DoD did not implement the guidance in a timely manner. Moreimportantly, most DoD organizations that received DFI funds did not followthe guidance. Only one of these organizations established the required

account and, as a result, accounts were not established for $8.7 billion (96%)of the DFI funds made available to DoD.

DoDs guidance also directed organizations that received DFI funds toreconcile all transactions prior to the time the guidance was issued.However, the reconciliations were not done. Due to the lack of records andpersonnel knowledgeable about financial and management decisions, wecould not determine why the guidance was not followed. Because theaccounts were not reconciled, DoD must rely on its organizationsaccounting records to determine the status of DFI funds. Our selectivereview shows the records were not always complete. For example, DoDcould not provide documentation to substantiate how it spent $2.6 billion.

We also found differences in DoD contracting practices that impacted thereturn of DFI funds to the GOI. The Joint Contracting Command-Iraq/Afghanistan contracted on behalf of the GOI, while USACE and theU.S. Air Force Center for Engineering and the Environment (AFCEE)contracted on behalf of the U.S. government making those agenciespotentially liable for payment. As a result, USACE and AFCEE could notterminate their contracts and return remaining DFI funds when the GOIdirected DoD to do so at the end of 2007.

The lack of oversight and guidance has contributed to DoD organizationscontinuing to hold DFI funds. We found organizations with open contractsthat were holding funds, and also spending funds in some cases. USACEand one of its contractors and the U.S. Army Central Command (ARCENT)

are holding about $5.4 million and $28.9 million, respectively. In October2009, SIGIR recommended that DoD provide guidance to USACE on theuse and ultimate disposition of funds it was still holding. However, DoD hasstill not issued the guidance and the funds that USACE and ARCENT areholding are at risk of being expended. While DoD has taken steps to provideguidance for future contingency operations, the guidance does not cover theaccounting and reporting of funds such as occurred with the DFI in Iraq.
mailto:[email protected]:[email protected]


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SPECI AL I NSPECTOR GENERAL FOR I RAQ RECONSTRUCTI ON

400 Army Navy Drive Arlington, Virginia 22202

July 27, 2010

MEMORANDUM FOR THE U.S. SECRETARY OF DEFENSE

SUBJECT: Development Fund for Iraq: Department of Defense Needs To Improve Financialand Management Controls (SIGIR 10-020)

We are providing this audit report for your information and use. The report discusses theDepartment of Defenses accountability for funds received from the Development Fund for Iraq.We performed this audit in accordance with our statutory responsibilities contained in PublicLaw 108-106, as amended, which also incorporates the duties and responsibilities of inspectorsgeneral under the Inspector General Act of 1978. This law provides for independent and

objective audits of programs and operations funded with amounts appropriated or otherwisemade available for the reconstruction of Iraq, and for recommendations on related policiesdesigned to promote economy, efficiency, and effectiveness and to prevent and detect fraud,waste, and abuse. This audit was conducted as Project 1006a.

The Office of the Under Secretary of Defense (Comptroller), U.S. Army Corps of Engineers, andU.S. Central Command provided written comments on a draft of this report, and the commentsare included in Appendix D. We considered these comments in preparing this report andaddressed them in the report where appropriate.

We appreciate the courtesies extended to our staff. For additional information on the report,please contact David Warren, Assistant Inspector General for Audits, (703) 604-0982/

[email protected] Glenn Furbish, Principal Deputy Assistant Inspector General forAudits, (703) 604-1388/[email protected].

Stuart W. Bowen, Jr.Special Inspector General for Iraq Reconstruction

cc: U.S. Secretary of StateU.S. Ambassador to IraqU.S. Under Secretary of Defense (Comptroller)

U.S. Assistant Secretary of the Army (Financial Management and Comptroller)U.S. Assistant Secretary of the Navy (Financial Management and Comptroller)Commander, U.S. Central CommandCommanding General, U.S. Forces-IraqCommanding General, U.S. Army Corps of EngineersDirector, Air Force Center for Engineering and the EnvironmentU.S. Secretary of the TreasuryDirector of the Office of Management and Budget
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Table of Contents

Introduction 1Background 1Objective 3

DoDs Financial and Management Controls for DFI Funds Need

Improvement 4DoD Did Not Establish Required Financial Controls for the DFI 4DoDs Management Controls for the DFI Were Inadequate 7Defense Financial Management Regulation Needs To Be Expanded 8

Conclusions and Recommendations 9Conclusions 9Recommendations 9

Management Comments and Audit Response 10Appendix AScope and Methodology 11Appendix BAcronyms 15Appendix CAudit Team Members 16Appendix DManagement Comments 17Appendix ESIGIR Mission and Contact Information 23


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Development Fund for Iraq: Department of Defense Needs

To Improve Financial and Management Controls

SIGIR 10-020 July 27, 2010

Introduction

Since January 2004, the Department of Defense (DoD) has received about $9.1 billion from theDevelopment Fund for Iraq (DFI) for reconstruction activities in Iraq.

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The Special Inspector General for Iraq Reconstruction (SIGIR) previously reported onweaknesses in the U.S. Army Corps of Engineers (USACE) accounting for DFI funds andproblems with the DoD and Department of State process for facilitating payment of unpaid DFIproject invoices.

The DFI comprises fundsfrom export sales of petroleum, petroleum products, and natural gas from Iraq, and surplus fundsfrom the United Nations Oil-for-Food Program as well as frozen Iraqi assets. The Fund wasestablished in May 2003 by the Coalition Provisional Authority (CPA) Administrator, andrecognized by United Nations Security Council Resolution 1483, dated May 22, 2003. Theresolution requires that the funds be used in a transparent manner for: (1) humanitarian needs ofthe Iraqi people, (2) economic reconstruction and repair of Iraqs infrastructure, (3) continueddisarmament of Iraq, (4) cost of Iraqi civilian administration, and (5) other purposes benefitingthe people of Iraq. After the CPA was dissolved in June 2004, the U.S. government wasauthorized by the Government of Iraq (GOI) to administer the DFI funds made available forreconstruction projects until that authority was withdrawn effective December 31, 2007.

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Background

SIGIR is providing this report on DoDs overall accounting for DFI funds.

The CPA was established in May 2003 for the temporary governance of Iraq following theinvasion of Iraq. The CPA Administrator managed DFI funds from May 2003 through June2004, and CPA Regulation 2, Development Fund for Iraq, described the responsibilities for theadministration, use, accounting, and auditing of the DFI. The International Advisory andMonitoring Board was established by the United Nations to monitor and audit the use of theDFI.3

The CPA was dissolved in June 2004. The Interim Iraqi Government was responsible foradministering Iraqs affairs until the permanent Government of Iraq was formed in 2006. In June

2004, control of the DFI was transferred to the GOI and the Iraq Minister of Finance wasassigned responsibility for managing the DFI. The Minister of Finance established two accounts

Audit reports completed for the GOI indicated that U.S. government agencies did notmaintain a complete and accurate database of reconstruction contracts awarded by the CPA.

1 This figure updates information previously reported inDevelopment Fund for Iraq: Policy Guidance Needed ToEnhance Accountability of USACE-managed Funds, SIGIR 10-006, 10/29/2009.2 SIGIR 10-006 and Process for Continuing Invoice Payment for the Development Fund for Iraq Needs Attention,SIGIR 10-014, 04/27/2010.3 The International Advisory and Monitoring Board performed several audits of the DFI. The audit reports that wereviewed are listed in Appendix A.


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within the Federal Reserve Bank of New York for DFI funds: (1) the Central Bank of Iraqaccount (also known as the main account), and (2) the DFI sub-account (also known as thesecondary account). The sub-account was available to U.S. government agencies for their use,with GOI approval, in administering DFI contracts. Since January 2004, USACE receivedalmost $1.3 billion from the DFI main account and $827.6 million from the DFI sub-account for

relief and reconstruction contracting activities in Iraq.

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In addition to funds provided from the DFI main account and sub-account, DoD received DFIfunds from three other sources. When the CPA dissolved, $6.6 billion was transferred from theCPA Comptroller to the Joint Area Support Group-Central (JASG-C) Comptroller, a DoDorganization whose role was, in part, to manage and control the DFI funds transferred to it fromthe CPA. Some of the money was intended to pay for ongoing reconstruction contracts, butother funds were available for new contracts. In March 2008, $24.5 million in remaining cashwas returned to the GOI. Also, the Interim Iraqi Government provided $136.0 million in 2004and 2005 from the Central Bank of Iraq for the Commanders Emergency Response Program(CERP). The GOI later provided $270.0 million in 2008 to fund Iraq-Commanders EmergencyResponse Program (I-CERP) projects. All five sources of funds are listed in Table 1.

Table 1: Sources of DFI Funds Made Available to DoD Since 2004 ($ millions)

Source Year(s) Received Amount

DFI Main Account 2004 $1,274.8

DFI Sub-account 2004 827.6

Cash Transferred from the CPA 2004 6,641.1

Interim Iraqi Government 2004-05 136.0

Government of Iraq 2008 270.0

Total $9,149.5Source: SIGIR analysis of DoD data as of 06/10/2010.

From June 2004 through December 2007, the Minister of Finance gave DoD the authority tomonitor and confirm performance, certify and/or make payments, and otherwise administer theDFI-funded contracts and grants it had awarded. In addition to the JASG-C, we have identifiedseven other DoD organizations that shared these responsibilities: (1) U.S. Armys Project andContracting Office for Iraq, (2) USACE, (3) U.S. Army Central Command (ARCENT), (4)Multi-National Corps-Iraq (MNC-I), (5) Joint Contracting Command Iraq/Afghanistan (JCC-I/A),

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4 The DFI sub-account also included an additional $2.1 billion in deposits by the end of 2004. These funds wereused for electronic fund transfers to contractor bank accounts as well as to establish letters of credit at financialinstitutions to facilitate future payments on approved projects. These projects involved contracts administered byDoD agencies.

(6) U.S. Air Force Center for Engineering and the Environment (AFCEE), and (7)Department of the Navy.

5 The U.S. Central Commands Joint Theater Support Contracting Command subsumed JCC-I/As activities on June11, 2010. This new command is commonly known as the CENTCOM Contracting Command.


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JCC-I/A was the last organization to have such authority when the U.S. stewardship over the DFIended; however, it never received or managed DFI funds. Specifically, the Minister of Finance,in a letter to the Commander, JCC-I/A, agreed to extend JCC-I/As authority to administer DFI-funded contracts until December 31, 2007. In this letter, the Minister of Finance specified thatJCC-I/A should not award any new contracts after that date, nor renew or extend any previously

awarded contracts. The Minister also noted that all contracts were to be completed by December31, 2007, and that remaining funds were to be transferred from the sub-account to the mainaccount. SIGIRs prior work has noted problems with DoDs DFI accounting and raisedquestions as to whether DoD can fully identify the DFI funds potentially remaining in itsaccounts (see Appendix A for a list of these reports). The vulnerability of not having properfinancial and management controls over these types of funds was demonstrated in a 2005 SIGIRreport addressing paying agent activities in the South-Central Region of Iraq.6

Objective

The reportconcluded that the paying agents and the DFI Account Manager could not properly account foror support more than $96.6 million in cash and receipts. Consequently, SIGIR conducted acriminal investigation of the use of these funds which resulted in 8 convictions of CPA and DoDofficials for bribery, fraud, and money laundering; and $7.8 million in fines, forfeitures, and

restitution payments.

Our reporting objective is to determine whether DoD organizations adequately accounted for thefunds they received from the DFI.

While we were able to achieve the objective of our audit, our work was limited by a lack ofrecords maintained by the DoD organizations that received DFI funds. Additionally, we wereunable to locate personnel with knowledge of DFI activities in the 2003-2005 timeframe whenthe largest part of the DFI contracting activities occurred.

For a discussion of the audit scope and methodology, see Appendix A. For a list of acronyms,see Appendix B. For the audit team members, see Appendix C. For management comments, seeAppendix D. For the SIGIR mission and contact information, see Appendix E.

6Control of Cash Provided to South-Central Iraq, SIGIR 05-006, 04/30/2005.


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DoDs Financial and Management Controls for DFI

Funds Need Improvement

Weaknesses in DoDs financial and management controls left it unable to properly account for$8.7 billion of the $9.1 billion in DFI funds it received for reconstruction activities in Iraq. TheDepartment of the Treasury established guidance for accounting for non-U.S. government fundswhen U.S. agencies were acting as a custodian of those funds. DoD did not establish theguidance in a timely manner, but more importantly, once established the guidance was notfollowed. Because the guidance was not followed, DoD must rely on its organizationsaccounting records to determine the status of DFI funds. Our selective review shows the recordswere not always complete.

Additionally, DoD did not designate an executive agent responsible for developing policy oroverseeing the use of DFI funds and key information on using DFI funds was not transmitted tothe organizations that received funds. Instead, organizations were left to act at their own

discretion on contracting approaches, and some organizations wrote DFI contracts in a mannerthat has made the U.S., rather than the GOI, potentially liable. DoD organizations also continueto keep contracts open and are holding and spending DFI funds in some cases. SIGIR previouslyrecommended that DoD provide guidance on the use and ultimate disposition of funds being heldby USACE but DoD has still not issued the guidance. Also, unless DoD or other responsibleagencies establish and follow guidance in future contingencies, they will be unable to account forsimilar funds making them vulnerable to inappropriate uses and undetected loss.

DoD Did Not Establish Required Financial Controls for the DFI

DoD did not establish deposit fund accounts within the Department of the Treasury for about

$8.7 billion out of the $9.1 billion (about 96%) of the DFI funds it controlled. TreasuryFinancial Manual Volume 1, Part 2, Chapter 1500, Section 1535Deposit Funds Accountsstates that the Financial Management Services Budget Reports Division is to establish depositfund accounts for agencies to record monies that do not belong to the Federal government.Treasurys guidance states that to maintain accountability agencies must establish separatedeposit fund accounts to hold non-U.S. government funds, such as from a foreign government,for individual statutory authorizations or programs, for which the U.S. government is actingsolely as a banker, fiscal agent, or custodian. These accounts, a key financial managementcontrol, enable agencies to maintain accountability for non-U.S. government funds by trackingobligations and expenditures on a monthly basis, just as they would with U.S.-appropriatedfunds. According to a Treasury official, DFI funds are subject to this requirement, and each U.S.

government agency possessing DFI funds is responsible, in consultation with the Office ofManagement and Budget, for requesting that the deposit fund account be established.

The DoD Under Secretary of Defense (Comptroller) issued guidance for establishing depositfund accounts. However, the guidance was not issued until December 2004, about six monthsafter most of the DFI funds had been made available to DoD organizations for reconstruction.This guidance provided the Assistant Secretary of the Army (Financial Management andComptroller) direction on the establishment of a deposit fund account in accordance with the


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Treasury Financial Manual and noted that it applied to all parties involved in the receiving,disbursing, accounting for, securing, and reporting of DFI assets following transition from theCPA to the Interim Iraqi Government. The guidance also directed DoD organizations to developand implement procedures to reconcile DFI transactions prior to December 2004.

However, only one DoD organization established the required deposit fund account and reportedits DFI financial activities to the Department of the Treasury. ARCENT received a total of$136.0 million from the Interim Iraqi Government, the first allocation being received inDecember 2004, for use in the CERP. At that time, ARCENT deposited the money in a depositfund account in accordance with the DoD guidance. Later, in 2008, when the GOI provided anadditional $270.0 million in DFI funds for the I-CERP, ARCENT managed the funds as aseparate budget line in the original deposit fund account. As a result, ARCENT was readily ableto provide us with an accounting of its DFI obligations, expenditures, and remaining balances.The other DoD organizations were not readily able to provide that information.

SIGIR found that other DoD organizations that were required to establish separate deposit fundaccounts did not do so. It was unclear why some organizations such as JASG-C and the

Department of the Navy did not establish separate deposit fund accounts and instead used otherprocesses to track DFI funds. Our ability to determine this was limited due to a lack of personnelthat were knowledgeable about the subject and records maintained by these organizations. Wefound no evidence that DoD organizations reconciled their DFI transactions prior to December2004. Consequently, DoD is uncertain about the amount of DFI funding made available to DoDor the amount of DFI funding its organizations may be holding. We selectively reviewedavailable records from eight DoD organizations that received DFI funds and found theinformation was not always complete. For example:

During our visit to Iraq, we met with JASG-C officials to discuss their DFI contractingactivities associated with these funds. The officials told us they were not in Iraq at that

time and, therefore, were not familiar with JASG-Cs DFI activities. The officialsprovided us with electronic copies for all of JASG-Cs DFI files retained in Iraq. Ourreview of this information showed that $4.0 billion of the $6.6 billion in cash transferredfrom the CPA was intended to pay ongoing reconstruction contracts executed by theCPA. However, the electronic records did not show the manner in which these fundswere expended. JASG-C returned $24.5 million in cash in March 2008 to the GOI. Wecould not account for the approximately $2.6 billion in remaining funds made available toJASG-C from these records.

USACE was the only DoD organization to receive direct funding transfers, totaling about$2.1 billion, from the DFI accounts at the Federal Reserve Bank of New York. In

October 2009, SIGIR reported that USACE officials provided us with a computer-generated listing indicating that it received a total of $2.4 billion in DFI funding.7

7 SIGIR 10-006.

However, because it did not establish a single DFI accounting code, USACE experienceddifficulty isolating the amount of DFI funding made available to it. In follow-up work,USACE provided us copies of all available electronic fund transfer documents to supportthe amount of funding the agency received directly from the DFI main and sub-accounts.


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From the information provided, we could not determine or validate the source of theremaining $300.0 million USACE reportedly received. The gap occurred because therecords prior to 2004, including cash receipts in support of early U.S. reconstruction workauthorized by the CPA, were not readily available.

USACE did not establish a separate deposit fund account to report its DFI-funding status

to the Department of the Treasury. USACE officials told us they considered the DFIfunds as advanced payments for reconstruction work they were planning. As a result,USACE combined the funds with regular appropriations, including Military Constructionand Operation and Maintenance, for the purpose of reporting them to the Department ofthe Treasury.

MNC-I records show that, as of June 1, 2005, it had about $15.0 million in unexpendedDFI funds from the original $368.1 million in total DFI funds it received. MNC-Iofficials told us that MNC-I did not award contracts itself but instead provided the fundsto its subordinate commands to execute DFI contracts. MNC-I officials in Iraq at thetime of our audit did not have knowledge or record of the final disposition of the

unexpended DFI funds. The officials told us that DFI obligations and disbursementswere entered into the Armys Standard Finance System which is maintained by theDefense Finance and Accounting Service.

The Defense Finance and Accounting Service is responsible for identifying andimplementing finance and accounting requirements, systems, and functions for DoD.However, Defense Finance and Accounting Service officials told us they had no record ofMNC-I transactions involving DFI. We were unable to find any other office in DoD thatcould provide us with information on the status of these unexpended funds.Consequently, we could not reconcile MNC-Is obligations and expenditures for DFI.

We also could not identify the process and procedures that the Department of the Navyused to track DFI funds. Since the majority of funds were not in deposit fund accounts,we attempted to identify how much DFI the Navy as well as other DoD organizationsmay have received by querying the Iraq Reconstruction Management System. The datain that system, which captures the status of Iraq reconstruction projects, shows the Navyreceived $29.2 million in DFI funds. While in Iraq, we located and reviewed severalNavy DFI-funded contracts which confirmed that the Navy was involved in DFIcontracting activities. We contacted the Office of the Assistant Secretary of the Navy(Financial Management and Comptroller) as well as the Naval Facilities EngineeringCommand and were told they had no knowledge of these DFI contracting activities.

We contacted the Defense Finance and Accounting Service, but they did not have anyfinancial data on the Navys DFI-contracting activities. Due to the problems associated

with completeness and accuracy of data in the Iraq Reconstruction Management Systemand lack of readily available financial records, SIGIR is uncertain whether this representsthe Navys total amount of DFI contracting activities.8

8 For purposes of this audit, we used the data only to identify DoD organizations that we should talk to aboutpossible DFI contracting activities in Iraq. SIGIR previously reported that the data in this automated system wasinconsistent, inaccurate, and incomplete. See Comprehensive Plan Needed To Guide the Future of the IraqReconstruction Management System, SIGIR 08-021, 07/26/2008.


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DoDs Management Controls for the DFI Were Inadequate

DoD did not designate an executive agent within DoD to be responsible for establishing andoverseeing policy for, or controls over, the use of DFI funds. Also, key information on usingDFI funds was not transmitted to all organizations that received funds. DoD has not establishedmanagement controls to ensure consistent contracting practices when using DFI funds. SIGIRfound that some DoD organizations obligated DFI funds on contracts on behalf of the GOI, whileother organizations contracted on behalf of the U.S. government. This caused problems whenthe GOI directed that DFI contracts be terminated at the end of 2007. SIGIR also found that dueto the lack of an executive agent to oversee DFI policies within DoD, some organizations did notreceive information directing them to terminate contracts and return remaining DFI funds. Atleast two organizations and one contractor are holding up to $34.3 million in DFI funds.However, as previously discussed, SIGIR cannot be certain of the total amount of DFI fundsremaining in DoD organization accounts because of the lack of adequate financial controls.

DoD did not provide guidance on awarding contracts using DFI funds. Lack of guidance forreconstruction contracting in Iraq using DFI funds contributed to organizations conducting their

DFI activities differently. For example, JCC-I/A followed the practice put in place by CPAMemorandum #4 and awarded DFI-funded contracts on behalf of the GOI rather than the U.S.government. By contracting in this manner, the U.S. was not liable for payment and resolutionof these contracts; instead, the GOI was responsible for them. This enabled JCC-I/A to terminateDFI contracts and arrange for the return of $24.5 million in remaining DFI cash being held byJASG-C almost immediately after the GOI directed it to do so.

Conversely, contracting organizations such as AFCEE and USACE awarded DFI-fundedcontracts in a manner that could make the U.S. government liable for payment and resolution ofthe contracts. These organizations issued task orders on existing U.S. contracts in an attempt tospeed up the start time of the reconstruction work. Some contractors have DFI invoices that

have not been paid by the GOI, and questions have been raised by contracting officials withinAFCEE about whether the U.S. government could be liable for paying the outstanding invoices.Further, in a response to a congressional inquiry on DFI contracts, the U.S. Air Force Office ofLegislative Liaison, in a letter dated February 12, 2008, stated that contracts issued by AFCEEwere awarded with the mutual understanding that payment for work was backed by the authorityof the Federal Acquisition Regulation and the U.S. government. Moreover, USACE officialstold us that if the preferred method of contracting was between the GOI and the contractor, it wasnever communicated to them by any organization in DoD. Nonetheless, the practical result ofthese contracting practices is that USACE and one of its contractors are still holding up to $5.4million of DFI funds almost 2.5 years after the GOI directed their return.

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Similarly, DoD has not provided Department-wide guidance on terminating contracts andreturning funds to the GOI. USACE stated that DoD never directed them to terminate contractsand return remaining DFI funds when the U.S. authority to administer the DFI ended. USACEpreviously returned $13.1 million to the GOI as the result of a SIGIR investigation, and USACEis awaiting the completion of several audits before making a decision on returning the $5.4

9 The Defense Contract Audit Agency has questioned $2.1 million of the $2.2 million held by a USACE contractor.USACE is responsible for determining whether it will deny the claim and the final disposition of the funds beingheld by the contractor. USACE had not made its determination prior to the time this report was issued.


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million that it and one of its contractors are holding, according to a USACE official. Also,ARCENT officials stated they never received guidance or direction from higher headquartersindicating that residual DFI balances were to be returned to the GOI at the end of 2007, and thatno new DFI contracting activities should take place after that date.

In the absence of guidance, ARCENT has continued to spend DFI funds. ARCENT obligatedand expended most of its residual DFI balance remaining from the $136.0 million it received in2004 and 2005 for use in CERP projects. ARCENT records show that on December 31, 2007, ithad about $10.1 million in unobligated DFI funds from the $136.0 million it received in 2004-05to use for CERP projects that could have been returned to the GOI had DoD instructed it to doso. However, a U.S. Army Finance Center official concluded that when the GOI provided anadditional $270.0 million for the I-CERP on April 14, 2008, that residual funding from the initialDFI authorizations did not need to be returned. As a result, ARCENT authorized the initiation offive new CERP projects in 2008 and 2009 and continued to spend its unobligated funds from the2004-05 money. Only $473,000 remained as of May 19, 2010.

Furthermore, $28.4 million remains unobligated of the funds that ARCENT received in 2008.

The Memorandum of Understanding covering the implementation and oversight of the I-CERP issilent on if, or when, remaining funds should be returned to the GOI. However, due to the factthat there has been little recent activity in this account, we question whether ARCENT needs tohold the remaining I-CERP funds.

DoD has still not provided guidance on terminating DFI contracts and returning the funds to theGOI. SIGIR previously recommended the Under Secretary of Defense (Comptroller)/ChiefFinancial Officer develop guidance on the use and ultimate disposition of DFI funds that USACEwas holding because the GOI withdrew the U.S. authority for administering DFI funds effectiveDecember 31, 2007.

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Defense Financial Management Regulation Needs To Be Expanded

The Under Secretary of Defense concurred and estimated the actionwould be completed by January 2010. However, as of the issuance of this report, the guidance

had still not been issued. SIGIR believes that until DoD issues guidance for its organizations tostop obligating and spending DFI funds, the funds currently held by USACE and ARCENT areat risk of being expended without proper authorization from the GOI.

In November 2008, DoD established a new chapter within its Financial Management Regulationon administering, using, and accounting for vested and seized funds and property duringcontingency operations to ensure transparency and accountability of these assets.

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10 SIGIR 10-006.

The newchapter, however, does not cover the accounting and reporting of non-U.S. government fundssuch as the DFI. During our exit conference with the Office of the Secretary of Defense

(Comptroller), officials acknowledged the need for updated procedures for the accounting andreporting of all non-U.S. government funds made available to DoD for future contingencyoperations to prevent inappropriate uses of the funds to deter and detect loss.

11 DoD Financial Management Regulation, Volume 12, Chapter 29,Administering, Using and Accounting for Vestedand Seized Funds and Property During Contingency Operations. SIGIR has an ongoing audit of Iraqi seized andvested assets and will be reporting the results of this audit later in the year.


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Conclusions and Recommendations

Conclusions

Weaknesses in DoDs financial and management controls left it unable to properly account for$8.7 billion of the $9.1 billion in DFI funds it received for reconstruction activities in Iraq. Thissituation occurred because most DoD organizations receiving DFI funds did not establish therequired Department of the Treasury accounts or reconcile DFI accounts as required by DoD.Only one organization established the required account. DoD cannot readily and completelyaccount for its obligations, expenditures, and remaining balances associated with the DFI. Thebreakdown in controls left the funds vulnerable to inappropriate uses and undetected loss.

Further, no DoD organization was designated as the executive agent for managing the use of DFIfunds. This situation contributed to the lack of timely and adequate guidance on the use andreturn of DFI funds to the GOI. Differences in contracting practices contributed to DoDsinability to comply with GOI direction to terminate contracts and return DFI funds. DoD

organizations still have open contracts and are holding and spending DFI funds in some cases.

While DoD has taken some steps to provide guidance on the use of non-U.S. government fundsin future contingency operations, the guidance does not cover the accounting and reporting offunds such as occurred with the DFI in Iraq. Until it provides such guidance, DoD and otherresponsible agencies will be unable to properly account for similar funds in future contingencies.

Lastly, DoD has not issued guidance, as we recommended in October 2009, on the use anddisposition of remaining DFI funds and, until it does, these funds are at risk of being expended.

RecommendationsSIGIR recommends that the Secretary of Defense direct the:

1. Under Secretary of Defense (Comptroller) to update the DoD Financial ManagementRegulation to specify procedures for the accounting and reporting of all non-U.S.government funds made available to DoD organizations for use in future contingencyoperations. This guidance should also include the designation of an executive agentwithin DoD to be responsible for establishing and overseeing policy on the use of thesefunds.

2. Under Secretary of Defense (Comptroller) to establish specific milestones for issuing

guidance consistent with our recommendation in October 2009.

3. Service Secretaries and the Commander, U.S. Central Command to determine the amountof DFI funds their respective organizations received and whether they are still holdingany of those funds. At a minimum, these organizations would include the: (1) JASG-C,(2) U.S. Armys Project and Contracting Office for Iraq, (3) USACE, (4) ARCENT, (5)MNC-I, (6) JCC-I/A, (7) AFCEE, and (8) Department of the Navy.


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Management Comments and Audit Response

The Under Secretary of Defense (Comptroller), USACE, and U.S. Central Command providedSIGIR written comments. The Deputy Chief Financial Officer concurred with our

recommendations and identified specific actions it plans to take, and stated that all actions wouldbe completed by November 2010. SIGIR believes the identified actions, if implemented asplanned, will address SIGIRs concerns.

USACE and U.S. Central Command provided technical comments. Each stated it was concernedwith the draft report statement that DoD was unable to account for $8.7 billion of the $9.1 billionof the DFI funds it received for reconstruction activities in Iraq. USACE noted that it was ableto provide information on $2.0 billion of DFI it received and U.S. Central Command stated thelack of a deposit fund account does not result in lack of accountability for all of the funds DoDreceived. Based on these comments, we clarified our statement to note that DoD had notproperly established the required deposit fund accounts at the Department of the Treasury for$8.7 billion of the $9.1 billion it received.

USACE and U.S. Central Command provided other technical comments that SIGIR addressedwhere appropriate.


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Scope and Methodology

Appendix AScope and Methodology

In November 2009, the Special Inspector General for Iraq Reconstruction (SIGIR) initiatedProject 1006a as part of its series of audits on the Development Fund for Iraq (DFI). Ourreporting objective is to determine whether Department of Defense (DoD) organizationsadequately accounted for the funds they received from the DFI. This audit was performed underthe authority of Public Law 108-106, as amended, which also incorporates the duties andresponsibilities of inspectors general under the Inspector General Act of 1978. SIGIR conductedits work from November 2009 through June 2010 in the United States and Iraq.

While we were able to achieve the objective of our audit, our work was limited by a lack ofrecords maintained by DoD organizations that received DFI funds. Additionally, we wereunable to locate personnel with knowledge of DFI activities in the 2003-2005 timeframe whenthe largest part of the DFI contracting activities occurred.

To identify DoD organizations that participated in DFI contracting activities in Iraq, as a startingpoint, we relied on information contained in the Iraq Reconstruction Management System.SIGIR previously reported that Iraq Reconstruction Management System data suffered from alack of consistency, accuracy, and completeness.

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To evaluate the adequacy of financial controls over DFI funds, we reviewed financial records

and met with officials from the Department of the Treasury; Office of the Secretary of Defense(Comptroller); Assistant Secretary of the Army (Financial Management and Comptroller); andthe U.S. Army Corps of Engineers, Millington, Tennessee. We also reviewed financial recordsduring site visits to the Defense Finance and Accounting Service in Rome, New York andIndianapolis, Indiana, as well as the Federal Reserve Bank of New York. In addition, wereviewed prior SIGIR, International Advisory and Monitoring Board, and other reportsaddressing the adequacy of financial controls over the DFI.

However, for purposes of this audit, we usedthe data primarily to identify DoD organizations that may have received DFI funds for use inreconstruction activities. Additionally, we selectively reviewed the records of the eight DoDorganizations we identified as receiving DFI funds. We tested those records to assess theircompleteness and accuracy.

To attempt to determine whether DoD organizations were still holding DFI funds, we revieweddocuments and met with officials from the Office of Management and Budget; Department ofState; Department of the Treasury; Office of the Secretary of Defense (Comptroller); Assistant

Secretary of the Army (Financial Management and Comptroller); U.S. Army Budget Office; U.S.Army Central Command; U.S. Army Corps of Engineers; the Department of the Navy; and theU.S. Air Force Center for Engineering and the Environment. In Iraq, we reviewed DFI files andmet with officials from the Joint Contracting Command-Iraq/Afghanistan, Multi-National Corps-Iraq, Joint Area Support Group-Central, and the U.S. Army Corps of Engineers.

12Comprehensive Plan Needed To Guide the Future of the Iraq Reconstruction Management System, SIGIR 08-021,07/26/2008.


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The audit was conducted in accordance with generally accepted government auditing standards.Those standards require that SIGIR plan and perform the audit to obtain sufficient, appropriateevidence to provide a reasonable basis for our findings and conclusions based on our auditobjectives. SIGIR believes that the evidence obtained provides a reasonable basis for ourfindings and conclusions based on our audit objectives.

Use of Computer-processed Data

To determine the amount of DFI funding that DoD organizations received, we reviewed a varietyof computer-generated reports. For example, we reviewed computer-generated listings ofdeposits and disbursements from the DFI sub-account at the Federal Reserve Bank of New York,fund status reports developed by the Defense Finance and Accounting Service, and computer-generated spreadsheets provided by the Joint Area Support Group-Central. Where records wereavailable, we cross-checked these records with the computer-processed data to ensure accuracyof the data retrieved from the computer systems. For example, we compared the balances on theDefense Finance and Accounting Service-generated records to similar information contained in

Department of the Treasury records. As stated throughout this report, comprehensive historicalrecords depicting the DFI funding history and current status were generally not available.However, we consider the computer-generated data provided to and collected by SIGIR,including those contained in the Iraq Reconstruction Management System, to be sufficientlyreliable for the purposes for which they are used in this audit.

Internal Controls

In conducting this audit, we reviewed DoDs internal management and financial controls foradministering the DFI. As a key part of these controls, we reviewed the Department of theTreasurys Financial Manual addressing the requirement to establish deposit fund accounts for

agencies to record monies that do not belong to the Federal government. We also reviewedDoDs Financial Management Regulation, other DoD guidance and fund status reports, and helddiscussions with key officials to gain an understanding of the internal controls governing the useof DFI funds. We also considered comments and conclusions in independent audit reportsconcerning the adequacy of DoDs internal controls over the DFI. The reports we reviewed arelisted below. We presented the results of our review of internal controls in this report asappropriate.

Related Audit Reports

We reviewed the following applicable audit reports issued by SIGIR, DoD, Defense Contract

Audit Agency, U.S. Army Audit Agency, International Advisory and Monitoring Board, and theU.S. House of Representatives.

Special Inspector General for Iraq Reconstruction

Process for Continuing Invoice Payment for the Development Fund for Iraq Needs Attention,

SIGIR 10-014, 04/27/2010.


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Development Fund for Iraq: Policy Guidance Needed To Enhance Accountability of USACE-

managed Funds, SIGIR 10-006, 10/29/2009.

Comprehensive Plan Needed To Guide Future of the Iraq Reconstruction Management System,

SIGIR 08-021, 07/26/2008.

Attestation to Development Fund for Iraq Cash in the Possession of the Joint Area Support

Group-Central, SIGIR 08-012, 03/13/2008.

Iraq Reconstruction: Lessons in Program and Project Management, SIGIR, 03/2007.

Follow-up on SIGIR Recommendations Concerning the Development Fund for Iraq (DFI),

SIGIR 06-036, 01/29/2007.

Management of the Iraqi Interim Government Fund, SIGIR 06-031, 10/27/2006.

Iraq Reconstruction: Lessons in Contracting and Procurement, SIGIR, 07/2006.

Administration of Contracts Funded by the Development Fund for Iraq, SIGIR 05-008,04/30/2005.

Control of Cash Provided to South-Central Iraq, SIGIR 05-006, 04/30/2005.

Coalition Provisional Authority Comptroller Cash Management Controls Over the Development

Fund for Iraq, SIGIR04-009, 07/28/2004.

Department of Defense

Internal Controls Over Payments Made in Iraq, Kuwait and Egypt, Department of Defense,

Inspector General, Report No. D-2008-098, 05/22/2008.

Defense Contract Audit Agency

Defense Contract Audit Agency, Audit Report No. 4261-2009W17900003, 05/18/2010.

U.S. Army Audit Agency

Accounting for Seized Assets and Development Fund for Iraq Balances, USAAA, Audit Report:A-2008-0109-FFM, 05/22/2008.

International Advisory and Monitoring Board

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended31 December 2007, Independent Auditors Report, Ernst and Young, 06/12/2008.

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the year ended

31 December 2006, Independent Auditors Report, Ernst and Young, 07/05/2007.

Development Fund for Iraq, Statement of Cash Receipts and Payments, for the period from

1 July 2005 to 31 December 2005, Independent Auditors Report, Ernst and Young, 09/13/2006.


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1 January 2005 to 30 June 2005, Independent Auditors Report, KPMG, 09/29/2005.


29 June 2004 to 31 December 2004, Independent Auditors Report, KPMG, 04/06/2005.

U.S. House of Representatives

Rebuilding Iraq: U.S. Mismanagement of Iraqi Funds,U.S. House of Representatives,Committee on Government Reform-Minority Staff, Special Investigations Division, 06/2005.


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Appendix BAcronyms

ACRONYM DESCRIPTION

AFCEE Air Force Center for Engineering and the EnvironmentARCENT Army Central Command

CERP Commanders Emergency Response Program

CPA Coalition Provisional Authority

DFI Development Fund for Iraq

DoD Department of Defense

GOI Government of Iraq

I-CERP Iraq-Commanders Emergency Response Program

JASG-C Joint Area Support Group-Central

JCC-I/A Joint Contracting Command-Iraq/Afghanistan

MNC-I Multi-National Corps-Iraq

SIGIR Special Inspector General for Iraq Reconstruction

USACE U.S. Army Corps of Engineers


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Appendix CAudit Team Members

This report was prepared and the audit conducted under the direction of David R. Warren,

Assistant Inspector General for Audit, Office of the Special Inspector General for IraqReconstruction. The staff members who conducted the audit and contributed to the reportinclude:

Benjamin H. Comfort

M. Glenn Knoepfle

Jason G. Venner

L. Michael Welsh


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Appendix DManagement Comments


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Appendix ESIGIR Mission and Contact Information

SIGIRs Mission Regarding the U.S. reconstruction plans, programs, and

operations in Iraq, the Special Inspector General for IraqReconstruction provides independent and objective:

oversight and review through comprehensive audits,inspections, and investigations

advice and recommendations on policies to promoteeconomy, efficiency, and effectiveness

deterrence of malfeasance through the prevention anddetection of fraud, waste, and abuse

information and analysis to the Secretary of State, theSecretary of Defense, the Congress, and the Americanpeople through Quarterly Reports

Obtaining Copies of SIGIR

Reports and Testimonies

To obtain copies of SIGIR documents at no cost, go toSIGIRs Web site (www.sigir.mil).

To Report Fraud, Waste, and

Abuse in Iraq Relief and

Reconstruction Programs

Help prevent fraud, waste, and abuse by reporting suspiciousor illegal activities to the SIGIR Hotline:

Web: www.sigir.mil/submit_fraud.html Phone: 703-602-4063 Toll Free: 866-301-2003

Congressional Affairs Hillel Weinberg

Assistant Inspector General for CongressionalAffairs

Mail: Office of the Special Inspector Generalfor Iraq Reconstruction

400 Army Navy DriveArlington, VA 22202-4704

Phone: 703-604-0368Email: [email protected]

Public Affairs Deborah HoranDirector of Public Affairs

Mail: Office of the Special Inspector Generalfor Iraq Reconstruction

400 Army Navy DriveArlington, VA 22202-4704

Phone: 703-428-1217Fax: 703-428-0817Email: [email protected]
mailto:[email protected]:[email protected]:[email protected]

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The Iraq Missing Billions Report

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